SUNS - NASDAQ

Thank you for standing by. My name is Kate and I will be your conference operator today. At this time, I would like to welcome everyone to the Sunrise Realty Trust Q1 2025 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Gabriel Katz, Chief Legal Officer. Please go ahead.

Good morning, and thank you all for joining Sunrise Realty Trust’s earnings call for the quarter ended March 31, 2025. I’m joined this morning by Leonard Tannenbaum, our Executive Chairman; Brian Sedrish, our Chief Executive Officer; and Brandon Hetzel, our Chief Financial Officer. Before we begin, I would like to note that this call is being recorded. Replay information is included in our April 15, 2025, press release and is posted on the Investor Relations portion of our website at sunriserealtytrust.com along with our first quarter 2025 earnings release and investor presentation. Today’s conference call includes forward looking statements and projections that reflect the company’s current views with respect to, among other things, market developments, our investment pipeline, anticipated portfolio yield and financial performance and projections in 2025 and beyond. These statements are subject to inherent uncertainties in predicting future results. Please refer to Sunrise Realty Trust’s most recent periodic filings with the SEC, including our quarterly report on Form 10-Q filed earlier this morning for certain conditions and significant factors that could cause actual results to differ materially from these forward looking statements and projections. During today’s conference call, management will refer to non-GAAP financial measures, including distributable earnings. Please see our first quarter earnings release uploaded to our website for reconciliations of this non-GAAP financial measure with the most directly comparable GAAP measures. The format for today’s call is as follows: Len will provide a general business and capital markets overview. Next, Brian will cover our view on the state of the commercial real estate lending markets, discuss our existing portfolio and provide an outlook for our investment pipeline. Then Brandon will provide an update on our financial position. After that, we’ll open the lines for Q&A. With that, I will now turn the call over to our Executive Chairman, Leonard Tannenbaum.

Thank you, Gabe. Good morning and welcome to our first quarter 2025 earnings conference call. As we are getting closer to our one year anniversary of trading on the NASDAQ, I am pleased with all of the progress that SUNS has made. For the quarter ended March 31st, 2025, SUNS generated distributable earnings of $0.31 per basic weighted average share of common stock, which was in the middle of the distributable earnings range that we pre-announced on April 22, 2025. At the same time, SUNS pre-announced that it expected book value per share to be $13.60 to $13.90 per share. As of March 31st, 2025, book value per share came in the middle of that range at $13.77 a share. As discussed last quarter, we provided guidance that our $0.30 dividend for the March quarter would be on or close to our first and second quarter distributable earnings. The guidance we provided last quarter remains unchanged as it pertains to the second quarter. Looking ahead, we are excited for the potential earnings growth in the second half of 2025 and the full year 2026, given that the construction loans in our current portfolio should accelerate funding over the next six to 18 months. These loans were structured with attractive rates and floors, which should benefit our future earnings as they are funded. Lastly, I'm pleased to announce that we now have five analysts covering SUNS, up from one analyst in 2024. We appreciate the added communication that our analyst community provides for our investors in SUNS. I will now turn it over to Brian to discuss the market and our portfolio.

Thank you, Len, and good morning. We continue to remain excited about our current portfolio, as well as the opportunity to continue providing credit to sponsors of transitional commercial real estate projects located within the southern United States. Earlier in the year, banks re-entered the market, providing an additional supply of capital. Yet, that has recently changed given the overall market volatility. Banks have again pulled back and are focused on more liquid loans, which has allowed alternative lenders like SUNS to continue meeting borrowers' transitional capital needs. We continue to believe that it is an ideal time to be at offense, selecting high-quality assets located in growing markets and backed by highly qualified sponsors. While the current administration's tariff policy has introduced broad uncertainty across the real estate markets, and particularly within the commercial real estate sector, after a thorough review of the construction loans within our existing portfolio, the team does not anticipate any material impacts to project budgets or timelines at this time. We will continue to monitor this as the administration's policies evolve. More generally, the team does expect that new construction activity will be more limited in the near term as sponsors and their potential lenders re-underwrite their budgets in order to account for potential cost volatility and supply chain disruptions stemming from the evolving trade environment. We expect that the continued uncertainty will create attractive opportunities to provide near-term financing solutions as the financial markets remain volatile and many conventional lenders remain conservative in their approach to providing loans to borrowers of transitional real estate projects. Turning to our portfolio, during the quarter ended March 31st, 2025, the TCG Real Estate platform originated $213 million loans, of which SUNS committed $148 million and funded $110 million of new and existing loans. As of March 31st, 2025, the SUNS portfolio had $352 million of commitments with $233 million funded. In the first quarter of 2025, SUNS successfully closed on $168 million of loan commitments, which include $20 million additional commitment in an existing senior loan to Panther National in Palm Beach Garden, Florida; $44 million in a senior loan for Shell Plaza, in New Orleans. Louisiana; $31 million in a senior loan for a residential asset in Aventura, Florida; $47 million in a senior loan for a residential asset in Dallas, Texas; and $26 million in a subordinate loan for a residential asset in Miami, Florida. Currently, the TCG Real Estate platform has two signed non-binding term sheets in documentation totaling $100 million and we expect SUNS to be allocated a portion of these investments. We believe that the SUNS portfolio is well positioned from an interest rate perspective as 88% of our current portfolio's outstanding principal is floating rate with a weighted average floor of 4.1%. Given the floors in place across our loan book, our credit line with an approximate floor of 2.6% presents a potential opportunity to expand SUNS' net interest margin. We expect that in the near to medium term, our portfolio composition will remain similar to our current composition with an emphasis on well-located residential and mixed-use assets backed by experienced and well-capitalized sponsors. Unlike most mortgage REITs, our portfolio consists entirely of new vintage assets. All loans are current and performing. We continue to remain bullish on the opportunities set in front of us and believe we have the team in place to execute on our strategy. TCG Real Estate's 8-person investment team has originators, underwriters, as well as in-house construction and portfolio management professionals who all focus on curating and maintaining an attractive loan portfolio and generating strong risk-adjusted returns for our investors. With that, I will now turn the call over to Brandon Hetzel, our Chief Financial Officer.

Thank you, Brian. For the quarter ended March 31st, 2025, we generated net interest income of $4.6 million and distributable earnings of $3.5 million or $0.31 per basic weighted average common share and had GAAP net income of $3.1 million or $0.27 per basic weighted average common share. We believe that providing distributable earnings is helpful to shareholders in assessing the overall performance of SUNS business. Distributable earnings represents net income computed in accordance with GAAP, excluding non-cash items such as stock compensation expense, unrealized gains or losses, and the provision for current expected credit losses. For the quarter ended March 31st, 2025, the Board of Directors declared a $0.30 dividend per share. The dividend was paid on April 15th, 2025, to shareholders of record as of March 31st, 2025. We anticipate that the Board of Directors will declare the second quarter dividend on or about June 15th, 2025. We ended the first quarter of 2025 with $352.1 million of current commitments and $233.4 million of principal outstanding spread across 12 loans. As of May 1st, 2025, our portfolio consisted of $352.1 million of current commitments and $239.3 million of principal outstanding across 12 loans with a weighted average portfolio yield to maturity of 12.1%. I'd also like to note that as of March 31st, 2025, our CECL reserve is approximately $158,000 or seven basis points for our loans at carrying value. As of March 31st, 2025, we had total assets of $234.4 million and our total shareholder equity was $184.8 million or a book value of $13.77 per share. With that, I will now turn it back over to the operator to start the Q&A.

[Operator Instructions] Your first question comes from the line of Gaurav Mehta with Alliance Global Partners. Your line is open.

Thank you. Good morning. I wanted to ask you on loan pipeline. I think in your presentation, you highlight $800 million active pipeline, which is different than $1.4 billion that was in the last presentation. I wanted to get some more color on what changed in the pipeline and what you were seeing in the market?

Sure. Yeah. And thanks for the question. As you know, the pipeline is always evolving. Deals come in and come out. We've seen since then some more interesting deals that we think are more actionable. Other deals move to the sidelines. So it's constantly evolving. But I think the overarching theme is that we see the pipeline being very strong right now. And the opportunity set for us is primarily as a result of what we're seeing is some lenders pulling back. And I think that's having basically a reinforcing effect, a knock-on effect of existing owners of real estate seeing that they need to figure out a solution for their incumbent lenders to take them out. There's just less of an interest to continue to kick the can down the road, if you will. So that's created a bunch of opportunities for us. Obviously it’s, as I said, they're always coming in and out. We did announce, as you heard, we have two deals that are in non-binding term sheet mode. And we continue to pursue several others that we're excited about.

Okay. The second question I wanted to ask you was on the Dallas loan that you guys announced in March of 25. The rate on that loan seems to be lower than the overall yield for the portfolio. I just wanted to learn more about that project.

Yeah, sure. So a couple of comments. One, that loan is in line with or how we think about portfolio construction. We're going to go after some deals that have higher rates of return, some deals that we think in this case, this particular deal is an existing multifamily asset, cash flowing in Dallas, as you point out. We also have taken that deal down from a whole loan perspective and create the opportunity we expect to back lever that at some point in the future, likely, depending upon where the opportunities set as we see it. So I think it keeps in line with our objective is still the same from a yield perspective overall portfolio wise, as we've indicated. But importantly, we'll constantly throttle up and throttle down based upon certain opportunities that we see that are interesting that present really good risk adjusted returns. One other point I'll just make is that on these types of deals, what we're seeing is there's a lot of lender activity to get attractive financing, deals that are near or at stabilization. So again, goes back to my comment about the ability to back lever.

The other really interesting thing about, this one is Len Tannenbaum speaking, is that the floor on this loan is substantially higher than the floor on our credit lines. So there is an opportunity if interest rates decline to capture additional yields.

Okay. And then lastly, are you guys expecting any more management fee waiver this year?

So the total management fee waiver was $1 million that we promised on the offering to help smooth the earnings and help with the earnings of the company. I think there's some additional waiver into the second quarter, Brandon.

There is. You'll see in Footnote 12 of the Q, we waived approximately $570,000 of base management fee and about $300,000 of incentive fee for the quarter.

Okay. Thank you. That's all I have.

Thank you very much.

Your next question comes from the line of Randy Binner with B. Riley. Your line is open.

Hey there. Thanks. Yeah, actually just a couple of clarification questions on the last set there from Gaurav. Just understood on the waiver of the management fee for the reported quarter here, the first quarter, but it goes back to its standard level for the second quarter and forward, correct?

So we promised to waive $1 million in fees. So far we've waived $800,000 something.

Approximately $860,000.

So you can expect us to fulfill our commitment on a million. We'd probably waive $140,000 in the next quarter.

Understood, thank you. And then on the Dallas, Texas residential loan that was discussed, I apologize that I missed it, but did you quantify what the floor was on that project?

No, but is it in there?

Yes. In Footnote 3 of the Q, you'll see the floor for that loan is 3.9%.

Okay. Thanks. I haven't gotten through the Q footnote. I appreciate that.

I didn't realize it was in there. Brandon's pointing it out, but so 3.9% is substantially higher than the 2.6% on our credit line.

Got it. Okay. Yeah, that is attractive, understood. Any, you know, is there any, I mean, it sounds like construction, the activity might slow down a little bit, which is understandable. But just geographies, you're still liking where you are. I mean, are there other areas that you would see expanding to or there's still plenty of opportunity in Florida and Texas and I mean, you have one in Louisiana, but is there kind of an expansion of the aperture on geography or are you still very comfortable in these states?

Hey, Randy, it's Brian. The answer is we're definitely still very comfortable within our target states. Clearly, there's a lot of activity that remains in those states and we're seeing a good amount of deal flow from Florida and Texas. You know, that being said, as we have said in past calls and we're fully focused on is, as you say, opening the aperture and expanding the overall portfolio to some of our other target markets in the South. So, as you know, we did a deal in Louisiana. We are looking at a multitude of deals in Atlanta, in parts of the Carolinas, Virginia. So, there's definitely some other states that we're spending a good deal of time on. I didn't mention, but we certainly are spending time in Tennessee as well. Our focus is absolutely to increase that portfolio diversification, but that being said, I think we'll continue to remain focused in Florida and Texas because that's really where we're seeing a tremendous amount of opportunities.

Okay, thanks for that. That's all I had. Appreciate it.

Thank you.

Your next question comes from the line of Jade Rahmani with KPW. Your line is open.

Thank you very much. In terms of the residential housing market, we are seeing a good amount of softness post the tariff announcement and it's causing some concerns. And Florida is one of the markets where supply is elevated. So, I wanted to get your updated views on the Florida residential market and with respect to the existing construction projects, if there's any risk you see in terms of the -- for sale condo projects.

Sure. Thanks for the question. It's Brian. So, yeah, we -- and listen, we're seeing the same things or reading about the same things. There was obviously just an article recently about the Miami market and the knock-on effects potentially of tariffs. We are right now within our existing book, sales that we've seen have been holding up relatively well. We are certainly focused on whether or not absorption is going to slow and monitoring that, of course. I think that any new deals that we're looking at now, we are naturally extending out the absorption schedules and as a result, creating a more robust overall capitalization, carrying costs, interest reserves, etc., as we analyze whether those deals make sense or not. It's likely going to mean that several deals are not going to make sense. And so, we're just being more cautious. And again, the book right now and the deals we're looking at so far, we're seeing some good activity. That being said, it's a little bit too early to see the overall effects just yet.

Okay. Thanks for that. So, I think it's, wait and see, is what my overall takeaway. You're not seeing any signs of weakness as yet, but it's a bit early to make any judgment. In terms of capital, where things stand right now on leverage, which is very low, capital availability with respect to funding existing commitments and making new loans. Can you touch on how you're thinking about it? Any plans for the year? Things have become quite choppy in the capital markets, but they still are open. So, I wanted to get your thoughts on that. Thank you.

Right now, we have enough capital to definitely execute on our business plan. First, from a relatively undrawn unsecured line of $75 million. Second, we fully expect the bank line, which is an accordion to $200 million to fill out over the course of the next couple of quarters. And so, you should see those announcements. So, we have plenty of availability to fund the business plan to continue to grow. So, that's the good news. As I think I've telegraphed to the Street and maybe I'll do it again, our full intention is to do a unsecured raise in the fourth quarter of the year, or September through the fourth quarter of the year through December. So, we'll see where the markets are. We'll see where interest rates are. My hope is that we get a good one done. We saw FBRT's raise recently. So, we're monitoring the market with our capital partners.

Thanks very much.

Thank you.

Your next question comes from the line of Tyler Batory with Oppenheimer. Your line is open.

Thanks. Good morning, everyone. So, my first question, in the prepared remarks and then when you pre-announced as well, you highlighted that TCG had signed two term sheets for $100 million. So, can you just unpack a little bit more what might be allocated to SUNS? What factors go into that allocation decision? And then just the timeline in terms of getting that across the finish line?

Great question. And so, TCG allocates it to SUNS to our private REIT SRT and to a side pocket if should there be overflow from those two vehicles. And we don't -- we don’t know yet what allocates to SUNS or SRT yet. We try to make those decisions on capital availability closer to the time the deal closes. Some of the reasons where we are out of control, actually, it's not in our control on one of these deals closing, for example, is there are conditions precedent for us to close deals, like we want certain things to happen before those deals are closed. And those things have to happen and it's not in our control for them to happen. One example could be they're subject to a certain tax that has to come off the tax rolls so that the debt yield is higher. And that's the case in one of them, for example. So, not to go into super weeds in the details, but sometimes there's conditions precedent to those loans. Same thing, by the way, with Jade's former question, which I sort of missed on funding. These residential loans and multifamily loans are constantly subject to rebalance. And these guys have come into balance with the new absorption schedules should absorption slow. We immediately pick up on it and ask them to fund additional equity to provide us cushion. But by the same token, we have a lot of construction loans and we're not going to fund the construction loans, even dollar one, unless we rebalance into whatever the current environment is. So, for the unfunded construction loans, we're going to take a look at them before we fund them and say, hey, where is the world and where is the absorption schedules? And does the escrows and all of that account for that? The other really great thing about real estate, which as a direct lending background, I didn't fully appreciate, is these are personal guarantees. And we make sure they have a liquidity and balance sheet for these personal guarantees, both on completion guarantees or funding guarantees, bad boy guarantees, etc. So, this isn't just the asset itself, guarantees behind the asset, sometimes LCs or letters of credit supporting that. So, there's a lot of cushion in the way Brian and team structures these deals that allows us to adjust depending on the market environment.

All right. Great detail, I appreciate that. Maybe more a housekeeping question on the debt side of things. In terms of the bank line, throwing that out to $200 million, just talk a little bit more about timeline, steps that need to be taken to get there? And then, as you start to expand it, any possibility that the terms change as well?

So, the terms, we don't expect the terms to change, right? We have an accordion up to $200 million. We expect the general terms of it to stay the same. There may be additional restrictions in debt leverage or stuff like that. As you add banks to things, they always want a couple of more hooks. But the basic economic terms will stay the same. Or we expect them to stay the same, I should say. Look, it is a little bit slower than I would have thought. I would have hoped on this call to say, okay, we have following additional banks in the credit line. I'm not able to say that because that's not true. But we do expect that to continue to happen. So, hopefully, by next quarter's call, we're talking about the additional banks into the credit line and the expanded credit line for SUNS.

Okay. Okay. And my last question just on the dividend. I mean, still expecting Q2 to be pretty much in line with distributable EPS and kind of how you're thinking about what's the payment level, if you will, for the rest of the year?

So, two comments that we made. So, we'll just point to the two comments. One, we gave guidance similar to Q1 that Q2's $0.30 dividend will be at or close to that level, in terms of [range]. That's what our current expectation is. And then the one really interesting thing that I think I said was I'm really excited about the next six to 18 months of funding these construction loans, which will give us some earnings power into the second half of the year and into next year.

Just to clarify what I said. Just to clarify that the Q2 earnings will be at or around the Q1 dividend of $0.30. The Board of Directors will declare the Q2 dividend on or around June 15th.

That's correct.

Okay. Okay. All right, that makes sense. Okay, that's all from me. Thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to CEO Brian Sedris for closing remarks.

Great. Well, thank you, operator, and thank you all for joining us today. We are excited about the opportunities ahead, and we look forward to sharing our progress with you over the coming quarters. Have a good day. Take care.